It’s amazing how quickly the summer holidays come to an end, but they have been over for investors for the past couple of weeks if recent market action is any indication.

Market volatility, otherwise represented and measured by the VIX, has tripled from its lows of roughly 13 per cent during the recent rout in global equity markets. The VIX two weeks ago spiked to more than 50 per cent, its highest single reading since January 2009.

Unfortunately, there are many advisers out there touting their ability to manage this sudden spike in volatility, but they may be doing more harm than good.

Here are five so-called riskmanagement strategies to look out for that could blow up your portfolio instead of helping it during such unstable times.

Stop-loss orders

One of most common riskmanagement tools is the stop-loss order, which kicks in once a certain price below the current market price has been breached. In theory, this is done to protect against a sizable correction, given that the position is liquidated at a much higher level.

In practice, however, stoplosses can be quite ineffective during periods of excess volatility and can even prove quite dangerous, resulting in some sizable realized losses.

A great example of this was the mini-exchange-tradedfund flash crash two weeks ago when a handful of ETFs, both in Canada and the U.S., traded as much as 40 per cent offtheir indicative values at the open.

This was not good news for those whose stop-losses were blown through, converted to market orders and sold at ultralow levels, only to see the ETFs substantially recover shortly thereafter.

Another serious problem with stop-losses is that they are often visible to high-frequency traders who, in turn, will purposely stop-out those orders and then push the price back up again.

Proper hedging requires the use of options contracts.

Averaging down on losing positions

This strategy is akin to gambler’s ruin, as investors only compound their problems in order to avoid taking a loss.

If the fundamentals surrounding an investment thesis change, it is often more prudent to realize the loss, receive the tax benefit and simply move on to a better-run company or a fundamentally stronger sector or country.

Chasing near-term returns

Investment advisers are notorious for selling financial products based on recent performance. But performance chasing only works if past results can predict future gains, which you know is not the case if you read the tiny warning required on investment product fact sheets.

Vanguard Group put out a great study last year showing that performance chasing underperformed simple buyand-hold strategies by a whopping 40 to 60 per cent.

Being a contrarian helps to identify undervalued opportunities in sectors or markets that are overlooked simply because they have not been recent market leaders.

Buy low volatility

Keeping with the theme of chasing near-term returns, there has been a flood of money to low-volatility funds. These funds are often dominated by momentum stocks, which should outperform in a low-volatility environment, but this does not necessarily mean they will protect against correcting markets.

Over the past few weeks, some of these momentum stocks in sectors such as health care and technology have been hit the hardest and, as a result, the low-volatility funds have provided little downside protection – in some cases, worse than the broader equity markets.

Chasing yield

Advisers often tout the motto “get paid while you wait.” But most markets are very efficient and companies with the highest yields have them for a reason – risk.

Simply look at the massive adviser demand for new preferred share issues over the past few years here in Canada. Advisers were recommending them as a safe replacement for bonds, especially the rateresets with their protection against rate hikes.

Many of these preferred shares are now down a shocking 20 to 40 per cent, thanks to two rate cuts this year from the Bank of Canada. As a result, they are significantly underperforming both short-and long-duration bond portfolios.

The good news is that there are some very effective strategies to manage one’s exposure to the market volatility and even potentially benefit from it. But a big first step is avoiding those that actually increase your risk rather than reduce it.

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